Menu
Menu
A Question of Balance

A Question of Balance

In 1997, Mobil Oil Australia (MOA) realised corporate IS was costing it substantially more as a proportion of the total cost of doing business than in best-practice international oil companies. Consequently, the company initiated the "Systems Breakthrough" project. In addition, to help achieve its objective of business alignment and becoming a sustainable best-in-market supplier of IT, MOA introduced the balanced scorecard approach. This it progressively implemented for IS staff throughout 1998 and 1999.

Today, all levels of IS staff at MOA are using fully aligned scorecards, and the company is confident it has played a significant role in becoming a leader in IS performance in the Mobil world -- from business alignment to sustainable best-in-market performance. The overall IS budget is less than 5 per cent of the company's cost of doing business -- easily measured because it is an IS scorecard metric In addition, the IS group is a credible supplier of both core business systems and value-adding IT services for new business developments.

In an era where corporations and market places are being transformed and redefined on an almost daily basis, most CIOs are hustling for tools to help them quickly align and mobilise IS shops around constantly shifting strategies and imperatives. Getting a handle on IT value is complex and difficult, but some companies are finding the elusive goal easier to achieve through using the balanced scorecard approach to probe the value of their investment in IT and its contribution to the business.

Scorecards are not for every organisation -- implementation costs can be prohibitive. All the same, GartnerGroup predicts 40 per cent of Fortune 1000 IS organisations will have in place by 2002 some form of strategic measurement system like the scorecard. And from a paper-based system, the balanced scorecard approach has evolved to where a plethora of desktop and Web software vendors offer tools to help collect and analyse measurement data.

Companies also use balanced scorecards to drive new strategic goals -- from prioritising budgets to building new customer service models -- more rapidly through the enterprise. The scorecards are proving a potent means of conveying corporate goals to the frontline workers responsible for delivering them. They also balance traditional financial measures like ROI against operational measures including customer satisfaction, internal business processes and an organisation's ability to innovate and learn.

According to Imprint Consulting business director Natalie Verdon, introducing balanced scorecards into management teams can have a "marvellous" effect, leading to a breakdown of traditional silo approaches to management. "The balanced scorecard's real strength is actually getting people to clearly explain why they chose to do what they're doing. It makes them become very focused on the why and the direction instead of a lot of the actions," Verdon says. It also allows communication between the senior management team and the board to be more proactive.

Scorecards list goals -- broken down into measurable metrics built from data collected throughout the business -- then measure and record the company's progress in reaching them. But they do have limitations. As the International Market Assessment (IMA) report "Making Corporate Performance Management Work" points out, while growth in IT makes it possible to use a wider range of performance measures than in the past, this can be a double-edged sword: more measures can lead to either greater insight or greater confusion. KPI (key performance indicator) creep can see the number of measures being used increase by stealth, until the system becomes unworkable. As the report puts it: "More measures do not necessarily mean a more effective performance management system."

Nonetheless, used well they can have dramatic effect. For instance, a comprehensive benchmark exercise was undertaken early this year at MOA. It found MOA had achieved near or best-in-market cost performance for most of its IS products, based on the rates of the prevailing market for outsourced supply. MOA GIS Infrastructure manager Raymond Bowring says product managers now show high levels of enthusiasm for the scorecards. Also, the scorecards themselves have created significant behavioural change: both in product managers, in regard to managing supply efficiency, and in the accountability of process owners for their IT demand.

Peter Hind, InTEP manager with research company IDC Australia, can testify to scorecards' effectiveness. He's been following MOA's success for the past five years and has had the chance to observe at close hand the dramatic transformation the balanced scorecard approach has delivered. Morale has soared over the last couple of years since the company introduced the balanced scorecards, Hind says. "Three years ago there was a very apprehensive environment. Today you get in there and there's a hum."

The Australian experience mirrors Mobil Oil's global success. From being one of the least profitable of the seven US oil companies in the early 1990s, MOA achieved a dramatic turnaround -- to number one -- just two years after adopting the balanced scorecard.

Look Forward, Not Back

AMPlus is the business unit within AMP providing IT services. It initially introduced balanced scorecards to help reset behaviours and monitor attempts to turn around an environment where 70 per cent of IT expenditure was looking after legacy systems rather than new development.

CIO Peter Dunne says AMPlus felt balanced scorecards were a better alternative than "historical rear-view mirror" financial measures to help turn around its spend ratio. "If you use a rear-vision financial view of the world you tend to end up making very operational decisions. It is much, much easier for somebody in a business division to justify putting yet another patch on top of a patch in an old system rather than really stepping back and saying: 'Is this really an outcome we're looking for, for the overall good of the business in the future?'"To initiate the turnaround AMPlus initially used the scorecards to try to make more efficient the area of the business involved with maintaining older systems. It focused heavily on measures of productivity, quality, savings and people. The approach proved highly effective. Today AMPlus' spend ratio has been effectively reversed, with just 30 per cent of expenditure going on legacy systems. The next step was to introduce the second part of the scorecard, focused on ensuring money saved is spent wisely on the future, on the development side of the unit.

Dunne says that here the scorecards have been instrumental in changing not only the behaviour of those development teams but also those in some of the businesses that are funding and benefiting from new systems. "It really does make everybody, both in the business and IT side, think about things from the top down rather than just the bottom up. So whether we're trying to get new capability, or build in reliability, or build in improved shareholder value, we start from the top down."

Value For Money

After doing an assignment on the use of balanced scorecards for his MBA, MLC Life's strategic business systems general manager Bob Kershaw says he's passionate about their value, even though they are used only in modified form within MLC.

MLC has a strong financial discipline and an equally strongly culture built around the three pillars of its business: its customers, shareholders and staff. Kershaw says all three stakeholders need to feel they are getting a value for money proposition out of the operation of the business. "The scorecard gives a broader perspective on understanding what's happening within the business. But it also helps develop a dialogue, an interactive dialogue, and it brings reporting out of the realms of being historic to being more predictive," he says.

But Kershaw warns other CIOs planning to introduce balanced scorecards against making them too sophisticated until they have fully understood their use and confirmed the reliability of their source information. "If you try to make it too sophisticated, it can be misleading, which might result in your taking wrong actions," he says.

Continous Process

The balanced scorecard approach is a continuous process that starts when you define both short- and long-term strategies then outline the business processes critical to achieving those goals. Only once that is done should you seek to determine the best ways to measure the effectiveness of those processes, by selecting the key performance indicators you should be tracking.

Cascade the scorecard throughout the organisation, ensuring the measures being tracked by business units link back to overall corporate strategies, and using ongoing feedback to keep the process on track. Measurements must be revisited and refined on a regular basis to ensure that they continue to reflect the company's evolving strategic vision.

Paul Lewis, associate partner Financial Services with Andersen Consulting, advises companies to pilot a scorecard with currently available measures and data. "If necessary use manual data sources with less frequent reporting," Lewis says. "This allows measures to be reviewed and refined and early benefits achieved. Waiting for fully integrated IT systems with sophisticated data interfaces delays implementation. The achievement of alignment is a major benefit in itself," he says.

But to take full advantage of the approach, be prepared to invest heavily in IT systems to support it. The IMA report "Making Corporate Performance Management Work" points out the crucial role information technology plays in corporate performance management. The report indicates any changes to the corporate performance management system inevitably require supporting IT investments to make them work.

"Building supporting information systems is an integral part of establishing a corporate performance management system," the report says. "Information systems are essential to capture, deliver and present performance data. The cost of these information systems can be significant, and, like other areas of IT, benefit can be difficult to quantify. The systems need to be seen in the broader context: as an essential element in the overall implementation of a performance management system."

Top-down Commitment

Costs of introducing a balanced scorecard can be steep. A February 1998 Tower Group report estimates the average cost at around $400,000, but says it can easily run into the millions for large organisations. Its introduction demands absolute top-down commitment. If the scorecard is to work, everyone from senior executives down must devote ample time to achieving consensus on the key performance indicators. They'll also all have to provide, collect, collate and analyse feedback on measurements.

And while Grant Saxon, a partner at accountancy PKF Sydney, says introducing a balanced scorecard approach makes a lot of sense, it is frequently more difficult than it seems. One potential stumbling block is the need to deal with the sceptics you will inevitably meet somewhere in the organisation.

A second is the need to avoid simply developing a list of measures you don't do anything with. "It's easy to come up with a lot of KPIs to measure all sorts of little things, but actually linking them together and tying them into strategy is pretty hard. A lot of companies will still go back to just measuring their profits or their return on assets, or whatever their traditional financial measurement might be," Saxon says.

At MOA, Bowring discovered a number of difficulties with implementation, including:

¥ getting process owners to own their use of IT;¥ getting the business to understand IT demand;¥ changing product managers' mindsets to accountability for efficiency of supply;¥ changing product managers' beliefs that this was just another change;¥ developing agreed scorecard metrics that met the IS group's objectives, were measurable, and provided incentive.

Don't expect to be able to introduce a balanced scorecard approach overnight, Bowring warns. There's a lot of legwork needed before you can hope for success. Nor should you ever consider a balanced scorecard as a silver bullet, says Andersen's Lewis. If balanced scorecards are to deliver on their promise to help strategically manage and change the organisation they must not only be incorporated into an overall performance management system, but also be extended to incorporate a dynamic element which measures the health of the change process itself.

Lewis says the focus should always be on communication, not control "The biggest value of a balanced scorecard is that it is a vehicle for bringing visibility to performance of the organisation with respect to its strategic goals and objectives. If the scorecard is developed from the perspective of being a control tool like a budget, it fails to deliver its benefits," he says.

Don't fall into the trap of expecting the balanced scorecard to guarantee a winning strategy. Lewis says the balanced scorecard can only translate a company's strategy into specific measurable objectives. Failure to convert operational performance into improved financial performance calls for a rethink of strategy.

Imprint's Verdon uses the term "environmental scanning" to describe the process organisations need to undertake before developing their strategy. "The balanced scorecard is really about designing your strategy, and then the business plans that will execute it," she says. "A lot of organisations are not very sure about their strategies. They really need to know the market place well, if they are to pick their strategy well, and then the business plan will complement that."

She cites the example of a small company, to which she was consultant, which had a strategy to take over the east coast market of Australia by moving into Queensland and Victoria. It looked like a great strategy on paper, but had the principals properly studied the marketplace they would have known Victoria was absolutely saturated with competitors. On the other hand, Queensland was not a bad area to go into. Instead, the company sunk a lot of money into Victoria, which it will never recoup.

"So one of the pitfalls for people is that they don't actually spend enough time scoping the right information to get the strategy right. That's the first step," Verdon says. "And Kaplan (one of the designers of the balanced scorecard approach) puts it really nicely, saying: 'If you don't know where you want to go, the scorecard is not going to help you'."

Nor should you expect the balanced scorecard alone to deliver the benefits. Lewis says the scorecard is a component of what has to be an integrated performance management system that stretches from the corporate strategic goals through subsidiaries, down to the individual staff members. Communication and engagement is the key. At one company he worked at the balanced scorecard runs all the way down from CEO to individual staff members and is used as the basis for determining annual incentive payments that can amount to up to 25 per cent of salary.

At AMPlus Dunne has found it can be quite a challenge to achieve consistency between the balanced scorecard and other reporting tools. "If you introduce the scorecard for parts of the business, and somebody else is using a different set of rules, you get into a lot of debate. You really do need to bring this thing in on a fairly comprehensive basis," he says.

There's also a danger that scorecard designers may fall into an accounting view of the world, filling the scorecard up with historical -- or lag indicator -- measurements and indicators, rather than forward-looking lead indicators. "When you're designing the scorecard you have to be very careful that you choose symptoms that are lead indicators, not lag indicators," Dunne says.

AMPlus uses such a lead indicator to help with retaining IT staff, recognising that to lose staff is to put projects at risk. It uses as a three-month lead indicator a staff survey indicating whether employees believe it is continuing to support its "workplace of choice" values. "If our staff start believing we no longer are respecting our workplace of choice values, all our research shows that three months after that our attrition rate will start to climb," he says. "So if we get a lead indicator like that going the wrong way, we start taking action; but if we used lag indicators the horse would already have bolted."

Scorecard Check-up

Ask these seven questions to avoid an "F" on your scorecard1. Is there a strategic vision?

If the strategic vision isn't clearly articulated, there's no way to apply measurements. A scorecard won't give you a vision, but it will tell you pretty quickly if the one you have is flawed.

2. Does the scorecard have executive buy-in?

If the CFO believes that the measurements won't help change behaviour, it's a self-fulfilling prophecy. Without consensus on such things as who your customers or shareholders are and what they expect from you, a direction can't be set to measure impact in those areas.

3. Do your initiatives and measurements tie into your strategy?

If initiatives and measurements don't link to strategy, you're expending resources on activities that won't contribute to your success.

4. Does your compensation program link to strategy?

Measurement motivates. It says that the company believes the things that are being measured are important to its success. If there's no reward for improving those measurements, there's no motivation to pursue those activities.

5. Do you have a real purpose for implementing the scorecard?

If you're downsizing, you already know what you need to do to survive. But if you're looking to create a strategic advantage, move into new markets or align recent acquisitions along common goals, then there's reason to proceed.

6. Are you communicating the scorecard's importance to every level of the organisation?

You need to translate vision into action from the business-unit level down to the individual employee. People need to understand the corporate vision in the context of their own responsibilities. Otherwise you can't expect them to contribute to the company's success.

7. Are you revisiting measurements to confirm their continued relevance?

An organisation is a living organism. If it stagnates, it dies. The scorecard has to reflect that dynamism. As the marketplace and the industry shift, you may need to de-emphasise certain measurements and re-emphasise others. It's an ongoing learning process.

-- Debby Young

Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.

Join the newsletter!

Error: Please check your email address.

More about AMPAndersenAndersenAndersen ConsultingDynamismIDC AustraliaKaplanMLCThree Pillars

Show Comments

Market Place